Navigating tax in a digital world

01 okt 2013

As global attitudes towards tax change, tech companies need to future-proof their tax practices to stand up to enhanced scrutiny.

The way in which companies markets and sells its services can also have tax implications. Therefore, one thing is clear – tax matters, and ambitious tech companies need to develop a tax strategy that can keep pace with their growth aspirations.

Shifts in attitudes and increased scrutiny

The climate for what is considered acceptable in tax planning has shifted considerably over recent years. Technology firms – especially large multinationals – have suffered their fair share of criticism. Negative PR can hurt technology giants, but it has an even greater impact on firms still expanding and building their reputations.

And tech companies are not just risking their reputations when it comes to tax. The OECD's base erosion and profit shifting (BEPS) project is creating new rules to outlaw and penalise artificial tax avoidance strategies. The project aims to address inconsistencies between different jurisdictions in their approach towards transfer pricing. The first action in its plan is to "address the tax challenges of the digital economy" – including where and how to tax new digitally enabled business models.

Getting ahead of the game in a new tax era

Major international tax reform is inevitable. For high-growth technology firms, the key is to recognise where the rules are heading and plan accordingly. Technology firms need to assess where the substance of their business sits in terms of its value creators – the people, the assets, the IP – and align their tax strategy accordingly.

Counting the costs of compliance

In their eagerness to tap new markets, growing tech companies sometimes overlook the compliance costs associated with expansion. Entering new jurisdictions means creating a distinct set of compliance requirements – not to mention new liabilities. Technology companies must ensure they are fully equipped.

Incentivising tech companies

However, opportunities abound for tech companies. Countries, states and cities are keen to revitalise themselves and be seen as destinations for talented people and cutting edge businesses. Therefore for tech companies there is an opportunity to strategically consider locations as they scale.